Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

5.3 Defining the Amount of Collateral

5.3.1 Types of CSA

Due to the very different nature of OTC derivatives counterparties, many different collateral arrangements exist. Broadly speaking, these can be categorised into the following.

(i) No CSA

There are two reasons why an institution may be unable or unwilling to post collateral. Firstly, it could be because their credit quality is far superior to their counterparty. Secondly (or additionally), it may occur because they cannot commit to the operational and liquidity requirements that arise from committing to a CSA.

One result of the above is that in some trading relationships, CSAs are not used because one or both parties cannot commit to collateral posting. A typical example of this is the relationship between a bank and a corporate where the latter's inability to post collateral means that a CSA is not usually in place (for example, a corporate treasurer may find it almost impossible to manage their liquidity needs if they transacted under a CSA).

(ii) Two-way CSA

For two similar counterparties, a two-way CSA is more typical. This is common, for example, in the interbank market. A two-way CSA is typically beneficial to both parties. Two-way CSAs may be skewed in some way. For example, one party may have a lower threshold than the other, which may be due to their inferior credit rating.

(iii) One-way CSA

In some situations, a one-way CSA is used which is beneficial to only the collateral receiver. Indeed, a one-way CSA represents ...